CA Appellate Court Rules Against Consolidated, Upholds Desist Order

Holding:

The Court of Appeal of the 1st District of California affirmed the defendant-respondent California Department of Corporation’s ("DOC) desist and refrain order against petitioners relating to their offer and sale of interests in two partnerships. Petitioner Consolidated Management Group, LLC (“Consolidated”) had formed two general partnerships engaged in the purchase and lease of oil and gas exploration and drilling equipment. In response, the DOC issued the questioned order, which was upheld by the Superior Court of San Francisco County. According to the Court of Appeal, securities offerings must actually qualify for a valid federal securities registration exemption, rather than only being sold pursuant to a putative exemption, in order to enjoy preemption from state regulation under the National Securities Markets Improvement Act of 1996 (NSMIA) and state statute. Here, the Court of Appeal found that substantial evidence established that the venture interests were covered securities subject to registration. Specifically, the partnership agreements presented to potential investors did not confer management powers, and that investors were essentially dependent on the managerial ability of petitioners.

Detailed Summary:

Petitioners in this appeal were Consolidated Management Group, LLC (“Consolidated”), Consolidated Leasing Hugoton Joint Venture # 2 (“Hugoton”), and Consolidated Leasing Anadarko Joint Venture (“Anadarko”).  Consolidated, a Kansas limited liability company with its principal place of business in Hutchinson, Kansas, established a number of Kansas general partnerships, including Hugoton and Anadarko, that purchased oil and gas exploration and drilling equipment and leased the equipment to oil and gas operators. This case arose from the sale of units of joint venture interests in Hugoton and Anadarko, which have their principal places of business in Wichita, Kansas. Among others, the August 5, 2005…

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